Follow us

The High Court has refused environmental NGO ClientEarth's application for permission for judicial review of the decision taken by the Financial Conduct Authority (FCA) to approve the prospectus of an oil and gas operator Ithaca Energy plc (Ithaca): R (on the application of ClientEarth) v Financial Conduct Authority [2023] EWHC 3301 (Admin).

Under s.87A of the Financial Services and Markets Act 2000 (FSMA), the FCA may not approve a prospectus unless satisfied that it contains the information required by the Prospectus Regulation (EU) 2017/1129 (Prospectus Regulation).

Although the claim itself was brought against the FCA, ClientEarth's press release upon filing the case focused on Ithaca and its interests in the Cambo and Rosebank oil and gas fields in the North Sea.

Key Points

  • The court reiterated well established principles of judicial review in making it clear that it will afford regulators broad discretion when exercising their expert judgment, regardless of the climate change context.
  • It will refuse to substitute its own views (or those of other interested parties) for those of the regulator.
  • Instead, the court will only intervene where the regulator has misdirected itself on the law, failed to take relevant considerations into account, or made an irrational decision which is a "high hurdle" to overcome.

Background

In 2022, Ithaca floated on the London Stock Exchange in the biggest public listing of the year. As part of that process Ithaca submitted a prospectus for approval by the FCA. Following the FCA's approval and publication of Ithaca's Registration Document in mid-October 2022, ClientEarth twice wrote to the FCA alleging deficiencies in the document's treatment of climate-related financial risks. Notwithstanding this, Ithaca received FCA approval for its final prospectus and published the document on 9 November 2022.

ClientEarth subsequently sought permission for judicial review of the FCA's decision alleging that the FCA's approval of Ithaca's prospectus for the listing was unlawful on the basis that: (a) the FCA erred in law by approving Ithaca's prospectus where it failed to disclose or adequately describe Ithaca's assessment of the materiality and specificity of its climate-related financial risks in breach of Article 16(1) of the Prospectus Regulation; and (b) the FCA's conclusion that Ithaca's prospectus contained the necessary information which is material to an investor for making an informed assessment of Ithaca's financial position and prospects, as required by Article 6 of the Prospectus Regulation, was rationally unsustainable.

On its initial review of the papers, the court found in favour of the FCA and refused ClientEarth's application for permission to apply for judicial review, following which ClientEarth exercised its right under CPR 54.12 to ask the court to reconsider its decision at an oral hearing.

Permission Decision

The court held that all the grounds put forward were unarguable and had no realistic prospect of success.

ClientEarth's arguments

At the oral hearing, ClientEarth submitted that the FCA:

  • misinterpreted Article 16 of the Prospectus Regulation and the European Securities and Markets Authority (ESMA) Guidelines on risk factors under the Prospectus Regulation in two respects. Firstly, by assuming that Article 16(1) of the Prospectus Regulation is satisfied by an issuer identifying material risk factors for inclusion in a prospectus, rather than including an assessment of materiality in the prospectus itself. Secondly, by mistakenly considering it is for the FCA to be satisfied under s.87A FSMA that a prospectus complies with Article 16(1) of the Prospectus Regulation, and that its decisions can only be challenged on public law grounds. Instead, the claimant argued that the question is whether an issuer has complied with its obligation to disclose its assessment of the materiality of a risk factor, and that is a hard-edged question of law for the court, not a matter of discretion or rationality. Similar arguments were made in relation to specificity of climate related risks, where ClientEarth alleged that the prospectus did not shed sufficient light on Ithaca's particular situation as opposed to identifying possible climate related risks in the industry generally.
  • acted irrationally in concluding the prospectus contained the necessary information material to an investor seeking to make an informed assessment of Ithaca's financial position and prospects and so met the requirements of Article 6 of the Prospectus Regulation. Ithaca was said to be in a comparable position to the companies referred to in the FCA's technical note TN801.2 (which states "many companies are likely to need to consider significant changes to their business" to achieve the goals of the Paris Agreement and the UK government's Net Zero Strategy). However, the prospectus did not adequately deal with the potential impacts of the Paris Agreement, were it to be fully implemented.

Error of Law

The court noted that Parliament has conferred upon the FCA responsibility for approving a prospectus. s.87A FSMA provides that the FCA may not approve a prospectus unless it is satisfied that the prospectus contains the information required by the Prospectus Regulation and all the other requirements imposed by the relevant provisions of FSMA. The FCA's decision to approve Ithaca's prospectus could therefore only be challenged on public law grounds (i.e. that it has misdirected itself on the meaning of the law it has to apply, failed to take relevant considerations into account, or made an irrational decision).

The court accepted the FCA's submissions that the requirements of Article 16(1) of the Prospectus Regulation are not hard-edged, and whether they have been met involves an evaluative judgment. In such a case, the court said that it may not substitute its own view if the FCA has made a rational assessment (as per R (Yukos Oil) v Financial Services Authority [2006] EWHC 2044 (Admin)).

In Lang J's view, the FCA's interpretation of Article 16(1) of the Prospectus Regulation was plainly correct on a natural reading. The court noted that Article 16 of the Prospectus Regulation and the ESMA Guidelines (a) require only the disclosure of material risk factors, and (b) limit the risk factors identified to those specific to the issuer, which must be adequately described. There is no separate requirement to disclose an assessment of the materiality or specificity of risk factors, nor for a particular form of quantitative or qualitative analysis.

The court distinguished R (Friends of the Earth) v SSBEIS [2022] EWHC 1841 (Admin) (see our previous blog post here), in which the Secretary of State's setting of the UK government's Net Zero Strategy was successfully challenged in circumstances where the court found that insufficient information was provided to the relevant Secretary of State in order to fulfil the obligations imposed by the Climate Change Act 2008, on the basis that here there was an expert regulator required to make an exercise of judgment as to whether certain legal requirements were met. The court concluded that there was no arguable error of law in the approach taken by the FCA or its conclusion that Ithaca had adequately described the relevant risk factors in circumstances where the prospectus "plainly did" address climate related risks.

Rationality

The court noted that the Paris Agreement was identified as a material risk to Ithaca in its prospectus (alongside other climate-related factors), and that the FCA was satisfied that the prospectus complied with Article 6 of the Prospectus Regulation. Though ClientEarth disagreed with this assessment and presented competing arguments as to compatibility with the Paris Agreement, it did not come close to demonstrating that the FCA had acted irrationally, which was a high hurdle to overcome. This ground was also dismissed as unarguable with no realistic prospect of success.

Accordingly, the court found in favour of the FCA and refused ClientEarth's application for permission to apply for judicial review.

Aarhus Convention

The court also considered whether the claim was an Aarhus Convention claim, for which a fixed costs regime applies limiting the costs recoverable between the parties.

The court noted that an Aarhus Convention claim is defined as including a claim brought by a member of the public for judicial review of a decision taken by a body exercising public functions which is within the scope of Article 9(3) of the Aarhus Convention. Article 9(3) includes challenges to public authorities contravening provisions of national law relating to the environment.

The court accepted that ClientEarth was a member of the public for the purposes of the Aarhus Convention, but found that neither s.87A FSMA nor the Prospectus Regulation form part of the UK's environmental law as their purpose is not to protect or otherwise regulate the environment (notwithstanding that the risk disclosures required by these provisions might incidentally relate to the environment). Any connection with environment and the purpose of the Aarhus Convention was said to be incidental and remote.

The court therefore concluded that the claim was not an Aarhus Convention claim.

Comment

This was an innovative attempt by an environmental NGO to use an existing statutory and regulatory regime to introduce heightened climate change considerations. However, the court made it clear that it was not part of the FCA’s function to evaluate the extent to which a prospectus may or may not promote climate change mitigation or net-zero targets. The court respected the discretion and decision making of the FCA as an expert regulator and limited itself to applying established public law principles despite the broader context of the climate crisis.

Although unsuccessful, the challenge highlights the increased scrutiny on climate issues and growing pressure on a wider range of regulators and public authorities who are not traditionally seen as operating in the environmental sphere.

It is also notable that the court was not prepared to classify the claim as environmental for the purposes of allowing costs protection for the claimant, which may serve to discourage other such speculative claims.

Andrew Lidbetter photo

Andrew Lidbetter

Partner, London

Andrew Lidbetter
Nusrat Zar photo

Nusrat Zar

Partner, London

Nusrat Zar
Jasveer Randhawa photo

Jasveer Randhawa

Professional Support Consultant, London

Jasveer Randhawa
Nihar Lovell photo

Nihar Lovell

Professional Support Lawyer, London

Nihar Lovell
Cat Dankos photo

Cat Dankos

Regulatory Consultant, London

Cat Dankos
Sarah Hawes photo

Sarah Hawes

Head of Corporate Knowledge, UK, London

Sarah Hawes
Tom Wyer photo

Tom Wyer

Associate, London

Tom Wyer

Related categories

Key contacts

Andrew Lidbetter photo

Andrew Lidbetter

Partner, London

Andrew Lidbetter
Nusrat Zar photo

Nusrat Zar

Partner, London

Nusrat Zar
Jasveer Randhawa photo

Jasveer Randhawa

Professional Support Consultant, London

Jasveer Randhawa
Nihar Lovell photo

Nihar Lovell

Professional Support Lawyer, London

Nihar Lovell
Cat Dankos photo

Cat Dankos

Regulatory Consultant, London

Cat Dankos
Sarah Hawes photo

Sarah Hawes

Head of Corporate Knowledge, UK, London

Sarah Hawes
Tom Wyer photo

Tom Wyer

Associate, London

Tom Wyer
Andrew Lidbetter Nusrat Zar Jasveer Randhawa Nihar Lovell Cat Dankos Sarah Hawes Tom Wyer